Are fintech companies outperforming banks?

FinTech startups challenge traditional banking models with competitive prices and more convenient and efficient customer service (Getty)

Radical transformations have taken hold in the global financial landscape in recent years, with the emergence of emerging financial technology companies, posing a challenge to traditional banking institutions. While a great deal of attention has been directed toward the innovative strategies of fintech companies, the response of incumbent banks has been varied and, at times, slow.

In this report, we attempt to delve into the evolving dynamics between banks and fintech, and explore banks' strategies to better navigate this new landscape.

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The rise of financial technology

The rise of fintech startups, which leverage technology to provide innovative financial services, has received significant attention in recent years.

Advances in technology have enabled these startups to challenge traditional banking models, by providing more convenient and efficient customer service and competitive rates.

Elizabeth Allan, a researcher at Canada's Carleton University and a consumer behavior analyst at RBC Bank, told Al Jazeera Net, "Consumption habits have evolved since the emergence of new technologies that have affected all sectors, and the banking sector is no exception."

She adds, "The primary mission of financial technology is to provide services related to the banking and financial sectors that want to be more efficient and effective, in addition to being less expensive than those provided by traditional commercial banks."

Financial technology companies have gained market share, which poses a huge threat to banks (Getty)

By focusing on areas such as payments and lending, fintech companies have succeeded in capturing market share, posing a huge threat to operating banks.

In response to this “destructive” force, as described by the American Massachusetts Institute of Technology, banks have found themselves at a crossroads, grappling with the need to adapt to changing consumer demands and technological progress.

Despite having significant resources and expertise, banks have been largely slow to embrace transformational changes. Instead, their reactions ranged from dismissive attitudes toward fintech innovations to passive engagement through startup investment.

Unbundling financial services

Fintech startups have mostly focused on unbundling banking, offering niche products and services with a strong focus on customer experience.

While FinTech innovation is primarily focused on the front-end, there is still untapped potential in revolutionizing the back-end infrastructure of financial services.

By developing new technology solutions and modernizing existing systems, fintech companies can address critical challenges in areas such as payment processing and messaging.

Kimberly Davidson, a former financial advisor at the Canadian financial technology company Coho, confirms to Al Jazeera Net that "the conclusion that can be reached is that financial technology encroaches on the areas of responsibility of traditional banks, and this applies to many financial services such as payments or credits."

However, the transition to the next generation of fintech, characterized by the development of proprietary back-end infrastructure, poses significant challenges.

Fintech startups must overcome regulatory hurdles and industry consensus to effectively establish new banking operations, according to observers.

Despite these obstacles, the evolution towards a technology-led backend is essential to ensuring the long-term viability and competitiveness of fintech companies.

Understand the basic differences

The rapid development of technology has greatly influenced consumer behavior in various sectors, including banking. However, traditional banks have faced challenges in keeping pace with technological advancements to meet the evolving demands of consumers.

The emergence of financial technology companies, fueled by these technological developments, has intensified competition within the banking sector.

This prompts us to explore the coexistence between these two entities: are fintech companies emerging only as alternatives to traditional banks, or are they poised to become direct competitors?

Traditional banks often rely on outdated traditional processes and technologies in a rapidly evolving financial landscape (Getty)

Fintech - a combination of "finance" and "technology" - refers to innovative companies that leverage digital technology to improve financial products and services.

These startups aim to provide efficient and low-cost solutions compared to traditional commercial banks.

FinTech companies are typically startups focused on rapid growth and innovation, offering new ways to pay and simplifying online transactions.

In addition, financial technology companies usually deal with small, specialized sectors, far from the comprehensiveness of banking.

On the other hand, traditional banks, which are licensed by regulatory bodies, offer a wide range of financial services, including deposit receipts, loans, wealth management and currency exchange.

These institutions, governed by central banks or national governments, operate in various forms and meet personal, commercial, and investment banking needs.

However, unlike fintech companies, traditional banks often adopt traditional processes and technologies, which can be considered outdated in the rapidly evolving financial landscape.

But Davidson points out that “traditional banking and fintech belong to the same register: providing financial services to consumers at the end of the day.”

The relationship between banks and financial technology companies

While fintech companies and traditional banks provide financial services, they differ significantly in their approach to technology adoption and innovation.

Fintech startups that embrace new technologies outperform traditional banks in terms of innovation and efficiency.

As a result, consumers increasingly prefer fintech solutions due to their flexibility and user-centric approach, encroaching on the traditional banking area, especially in areas such as payments and credits.

This dynamic sets the stage for direct competition between fintech companies and traditional banks, with the former gaining traction among technology-savvy consumers.

However, amid this competitive landscape, a complementary relationship may exist between banks and fintech companies.

Fintech companies - especially those specializing in regulatory technologies (regtechs) and payment technologies (paytechs) - provide complementary services to traditional banks, enhancing their ability to adapt to regulatory constraints and evolving customer needs.

Davidson emphasizes this symbiotic relationship, with the potential for banks and fintech companies to collaborate and leverage each other's strengths to provide improved financial services to consumers.

Banks' strategies for fight or flight?

As banks confront fintech companies, they must reevaluate their strategies to remain relevant in an evolving reality.

The Sloan Disruptive Technology matrix from the Massachusetts Institute of Technology provides banks with a structured approach to assess their readiness to innovate amid financial technology developments.

With a focus on motivation and ability, the matrix assesses factors such as market demand and technological capabilities. By utilizing this framework, banks identify strengths to leverage and weaknesses to address.

The matrix encourages proactive innovation and recognizes revolutionary technologies as opportunities for growth. Ultimately, the matrix guides banks to remain competitive and enhance value in an increasingly digital landscape, positioning them as leaders in the evolving financial industry.

The emergence of financial technology startups is a wake-up call for traditional banks and their need for innovation (Shutterstock)

Many industry experts see the emergence of fintech startups as a wake-up call for traditional banks, with the urgent need for innovation and digital transformation.

According to John Smith, fintech analyst at XYZ Research, “Banks have long enjoyed a dominant position in the financial services industry, but the rise of fintech startups has disrupted the status quo. To remain competitive, banks must adapt to... Changing consumer preferences and embracing technology-based solutions.”

Whether banks choose to “fight” between innovating and transforming traditional banking operations or “flight” by retreating to core competencies and enabling financial technology innovations, banks must adopt proactive measures to effectively survive the changing financial landscape, according to experts.

In their quest to deliver improved customer experiences, banks can leverage data integration to streamline operations and improve efficiency. By breaking down conventions and integrating disparate systems, banks can offer customers a seamless and intuitive user experience, similar to that of a fintech startup. From simplifying onboarding processes to providing real-time product recommendations, data-driven insights allow banks to strengthen their customer relationships and increase... Revenue growth.

The role of regulation and compliance

While fintech startups have enjoyed flexibility and speed in their operations, banks face stringent regulatory requirements that often hinder innovation.

Historically, compliance costs and regulatory burdens have been significant barriers for banks, stifling their ability to adapt to rapidly evolving market dynamics.

Furthermore, the regulatory landscape surrounding fintech remains complex and uncertain, posing challenges for both startups and traditional banks alike.

By employing the best talent and expertise, banks enhance their technological capabilities and drive innovation (Shutterstock)

To address these challenges, Elizabeth Allan says banks must cooperate with regulatory authorities in order to foster an environment conducive to innovation while ensuring compliance with regulatory standards.

She adds that a regulatory sandbox and simplified approval processes can facilitate experimentation and encourage the adoption of innovative technologies within the banking sector.

Moreover, banks can leverage regulatory expertise and industry partnerships to operate effectively and capitalize on emerging opportunities in the fintech space.

Investing in talent and technology

Investing in talent and technology is critical for banks seeking to maintain a competitive advantage. By hiring top talent with expertise in areas such as data science, artificial intelligence, and cybersecurity, banks can enhance their technology capabilities and drive innovation.

Moreover, strategic investments in advanced technologies and digital infrastructure enable banks to streamline operations, improve efficiency, and deliver personalized customer experiences.

As the fintech revolution continues to reshape the financial services industry, banks must embrace innovation and adaptability to thrive in a rapidly evolving landscape.

By reimagining customer experiences, leveraging data integration, and reevaluating strategic priorities, banks can effectively respond to the disruptive forces of fintech and position themselves for long-term success.

As the battle between banks and fintech intensifies, those institutions that embrace change and prioritize customer-centric solutions will emerge as leaders in the new era of finance.

Source: Al Jazeera